City Lights Shine for Equities in China

Investors Bet on Exodus From the Countryside, Spending by Urban Dwellers

By

Daniel Inman

Updated Feb. 27, 2013 2:45 p.m. ET

The rush of city life is luring foreign investors to Chinese stocks.

China's next premier has repeatedly pledged to redouble efforts to "urbanize" the world's second-largest economy and move more farmers into cities. Since November, when he was picked at the Communist Party's 18th National Congress, Li Keqiang has said that China needs to "push forward" with urbanization, calling it a "huge engine" of economic growth.

As China's farmers continue their exodus to the city from the countryside, some worry about food shortages. Will Freeman of research firm Dragonomics talks about which foods will be increasingly in demand as China becomes a country of city slickers.

His words have given the green light to money managers: Many are now jumping into Chinese stocks, wagering that a further expansion of China's cities will give a boost to consumer spending. That would trickle through to companies from property developers to health-care providers in the form of bigger profits and higher share prices.

The government's push has added fuel to the rally in Chinese companies listed in Hong Kong, the typical route for international investors looking to gain exposure to China. The Hang Seng China Enterprises Index, a broad measure of mainland Chinese companies listed in Hong Kong, is up 24% since early September, when it hit a nearly one-year low. The index on Wednesday ended 0.4% higher at 11144.34.

Investors' renewed focus on China's urbanization comes as the country rebounds from a slowdown. Many stocks are recovering from a heavy selloff in the middle of last year as the economy slowed and the euro-zone debt crisis frightened off fund managers venturing into Asia. Now, emerging-market investors surveyed by Bank of America-Merrill Lynch are the most bullish on China in a year.

More in China

China already has half of its 1.3 billion population living in urban areas, compared with 19% in 1979, when the country started to overhaul its economy.

Pioneer Investments, which had $204 billion worth of assets under management at the end of last year, estimates that residents of China's biggest cities, such as Beijing or Shanghai, on average spend as much as 2,104 yuan ($338) a month, compared with 435 yuan spent by a typical farmer.

Taking into account the millions that are expected to move to China's cities, the effect multiplies. The U.N. estimates that the population of China's cities will increase by 230 million by 2025 from the current 682 million. As a result, urban dwellers will make up 65% of China's population in 12 years, compared with 50% in 2011, according to the U.N.

ENLARGE

Some investors are targeting specific sectors that are most likely to expand as a result of the changes. Angelo Corbetta, head of Asian equities at Pioneer Investments in London, has been adding to his holdings of property developers active in smaller cities and companies that build energy infrastructure.

"We saw what was happening at the political level and so we decided to" invest in stocks exposed to the country's urbanization "in a more aggressive way," Mr. Corbetta said.

Others say that some of the enthusiasm for urbanization is already priced into some stocks.

"It remains unclear what specific targets or policy changes the new leadership will incorporate or prioritize in its urbanization blueprint," said Helen Zhu, chief China strategist at Goldman SachsGS-1.03% in Hong Kong.

Ms. Zhu says investors have bought into sectors like commodities and machinery on expectations that infrastructure investment will remain a pillar of urbanization. "However, it is possible that actual policies are more nuanced or more diversified in their impact," she said.

ENLARGE

Some investors are putting money into shares of property developers, among the top performers in the Hong Kong stock market this year. Above, a residential construction site in Beijing last month.
Associated Press

Among the top-performing shares in Hong Kong have been China National Building Material Co.3323-0.68% That stock has soared 60% since early September. The stock of major property developer China Resources Land Ltd.11091.16% has rallied 42% as the property market has shown signs of life in recent months after a period of dormancy brought about by a three-year government campaign to curb excessive prices.

The property market's strength, though, has renewed concern that Beijing could further tighten policy to control prices. Mainland Chinese shares in Hong Kong sank 4.5% last week after China's cabinet repeated a pledge to use a wide range of measures to curb speculation and put a halt to price rises in residential property.

"In the residential market, the policy restrictions will not be relaxed anytime soon," said Stanley Ching, head of the real-estate group at Citic Capital in Hong Kong. "We believe there is a still a policy risk."

Mr. Ching is focusing on retail, rather than residential, property, and has raised more than $500 million for a private-equity fund to invest in retail properties. He has invested in two shopping-mall projects, one in the southern city of Changsha and another in the eastern city of Hefei.

Others are looking away from property and seeking to take advantage of a wider range of spending by those moving to the cities, where higher-paying jobs are offered.

"Recent announcements reiterate how important urbanization is as a driver of China's economic growth," said Gigi Chan, manager of Threadneedle Investments' $100 million China Opportunities Fund in Singapore. She has stakes in construction firms, as well as water and environmental-protection companies.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.